U.S. CFTC chief expects margin rules by early 2013

Monday, 1 Oct 2012 | 2:06 PM ET

SHARES

By Alexandra Alper

WASHINGTON, Oct 1 (Reuters) - The top U.S. derivatives regulator said on Monday that his agency aimed to complete rules dictating the amount of margin, or collateral, needed to back uncleared swaps trades by early next year.

Gary Gensler, chairman of the Commodity Futures Trading Commission, said that the rules, proposed in April 2011, would be finalized with consideration given to insights offered by other international regulators.

"I would anticipate that the CFTC, in consultation with Europe, would take up the final margin rules toward the beginning of next year with the benefit of this international work," he said, according to remarks prepared for delivery at the Financial Markets Law Committee Seminar at the Bank of England in London, England.

The margin rules were mandated by the 2010 Dodd-Frank financial reform law, which seeks to boost transparency and limit risk in the $648 trillion over-the-counter swaps market.

A swap is a financial contract in which two parties exchange cash flows on debt, currencies, or other assets, to hedge risk or make a profit. Margin is the amount of collateral that traders post to back a trade.

Risky swaps trading at overseas affiliates of firms like insurer American International Group helped fuel the 2007-2009 financial crisis which led to multi-billion dollar taxpayer bailouts.

G-20 leaders in 2009 came to a consensus about working together to impose new rules on the opaque market.

In 2011, they agreed specifically to imposing margin on uncleared swaps. But the rules have been tricky, requiring tighter coordination, since big banks could easily relocate trading activity abroad if a foreign regulator offered lighter rules.

The CFTC said in July it would reopen its comment period for the rule, to allow the public the opportunity to read and weigh in on the rules in light of a study on margin, released by the International Organization of Securities Commission and the Basel Committee on Banking Supervision the same month.

That CFTC comment period closed on Sept. 14, while comments on the IOSCO paper were due by Sept. 28.

Despite Gensler's nod to international coordination on issues like margin, the chairman took a tough stance on the reach of U.S. swaps rules abroad, as laid out in guidance released by the agency in June.

"We need to recognize there will be times when we're unable to have exactly the same approach," he told the audience.

"Our laws tell us that when financial institutions operating outside the United States transmit risks directly into the United States through swap transactions with U.S. persons, such transactions should be regulated in the same manner as swap transactions within the United States."